The Effect of Value Estimation Errors on Portfolio Growth Rates

17 Pages Posted: 13 May 2008 Last revised: 10 Jan 2011

See all articles by Robert Ferguson

Robert Ferguson

AnswersToGo

Dean Leistikow

Fordham University - Finance Area

Joel Rentzler

City University of New York (CUNY) - Baruch College

Susana Yu

Iona College

Date Written: November 8, 2008

Abstract

This paper analyzes the impact of value estimation errors on portfolios' growth rates and relative growth rates (i.e. long-term returns and long-term relative returns) for several portfolio weighting methods. The portfolio weighting methods include capitalization weights, estimation error neutral weights, estimation error independent weights, Funda-mental weights, and Diversity weights. The paper provides theoretical support, in the context of estimation error, for the empirical findings that many non-capitalization weighted portfolios beat the market's capitalization weights. It also provides a theory for the size effect.

Keywords: portfolio growth rate, estimation error

JEL Classification: G11

Suggested Citation

Ferguson, Robert and Leistikow, Dean and Rentzler, Joel and Yu, Susana, The Effect of Value Estimation Errors on Portfolio Growth Rates (November 8, 2008). Available at SSRN: https://ssrn.com/abstract=1131672

Robert Ferguson (Contact Author)

AnswersToGo ( email )

6815 Edgewater Drve
Apt 208
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Dean Leistikow

Fordham University - Finance Area ( email )

33 West 60th Street
New York, NY 10023
United States

Joel Rentzler

City University of New York (CUNY) - Baruch College ( email )

17 Lexington Avenue
New York, NY 10010
United States

Susana Yu

Iona College ( email )

715 North Avenue
New Rochelle, NY 10801
United States

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